Even if it is environment based it will have to be "magical". But that doesn't mean I can hide in the open. If it's just down to my actual hiding skills it's too easy to cheat.
Let's say someone is hiding in the bushes. Server-side mechanics decide that he has successfully hidden, and will thus not send the data that he is there to other clients. In the same way you can hide in shadows, or whatnot. This way it won't be dependent on graphics, which really only is ok in single player games.
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